Does NAURA Technology Group (SZSE:002371) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that NAURA Technology Group Co., Ltd. (SZSE:002371) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for NAURA Technology Group

What Is NAURA Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 NAURA Technology Group had CN¥5.84b of debt, an increase on CN¥4.46b, over one year. But it also has CN¥12.6b in cash to offset that, meaning it has CN¥6.77b net cash.

How Strong Is NAURA Technology Group's Balance Sheet?

The latest balance sheet data shows that NAURA Technology Group had liabilities of CN¥20.5b due within a year, and liabilities of CN¥9.75b falling due after that. Offsetting these obligations, it had cash of CN¥12.6b as well as receivables valued at CN¥6.73b due within 12 months. So it has liabilities totalling CN¥10.9b more than its cash and near-term receivables, combined.

Since publicly traded NAURA Technology Group shares are worth a very impressive total of CN¥164.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, NAURA Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, NAURA Technology Group grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine NAURA Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. NAURA Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, NAURA Technology Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

We could understand if investors are concerned about NAURA Technology Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.77b. And it impressed us with its EBIT growth of 59% over the last year. So we are not troubled with NAURA Technology Group's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of NAURA Technology Group's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.